Upstream M&A activity soars 250 percent in Q2

Drillinginfo believes recent mergers and acquisitions, such as Diamondback Energy’s $9.2 billion acquisition of Energen Resources is the continuation of a trend of companies seeking economies of scale as the Permian’s shale plays mature.

Drillinginfo believes recent mergers and acquisitions, such as Diamondback Energy’s $9.2 billion acquisition of Energen Resources is the continuation of a trend of companies seeking economies of scale as the

Drillinginfo believes recent mergers and acquisitions, such as Diamondback Energy’s $9.2 billion acquisition of Energen Resources is the continuation of a trend of companies seeking economies of scale as the Permian’s shale plays mature.

Drillinginfo believes recent mergers and acquisitions, such as Diamondback Energy’s $9.2 billion acquisition of Energen Resources is the continuation of a trend of companies seeking economies of scale as the

Wheeling and dealing in the nation’s oil patch came roaring back in the third quarter, according to a report released by Drillinginfo.

Drillinginfo reported U.S. oil and gas M&A activity leaped 250 percent over the second quarter and broke all quarterly records dating back to the fourth quarter of 2012. Drillinginfo put the final third quarter tally at $32 billion, up from $9.1 billion in the second quarter.

Accounting for more than a third of that total was Diamondback Energy’s $9.2 billion acquisition of Energen Resources, the second highest behind Concho Resources’ $9.5 billion purchase of RSP Permian in the first quarter. Also contributing to the Permian Basin portion of the tally was BP’s $10.5 billion acquisition of a portion of BHP’s U.S. onshore portfolio, including BHP’s shale holdings in the Permian, Eagle Ford and Haynesville.

“We do believe this is a continuation of a trend,” Brian Lidsky, Drillinginfo senior director, said in a phone interview from his Houston office.

Lidsky said there were 16 deals of more than $1 billion each involving Permian operators – including EOG Resources buying Yates Petroleum, Noble Energy buying Clayton Williams Energy and ExxonMobil buying the Bass family of companies. The acquisitions totaled $51 billion.

“Certainly, there’s a trend of large companies wanting to upgrade their portfolios,” he said. Royal Dutch Shell is an example of a large company looking to expand its Permian portfolio, having lost out to BP in the contest for BHP’s shale portfolio, he said.

“It’s well-known with regard to BHP that Shell was very interested in that package. It’s a logical conclusion that Shell probably has the desire to do a deal and expand its presence in the Permian Basin,” he said.

The most interesting development in the third quarter was the outstanding land sale held by the U.S. Department of the Interior’s Bureau of Land Management in New Mexico, Lidsky said. That could drive further M&A activity, he said.

“(With) Devon showing outstanding results in the New Mexico portion of the Delaware, this land sale was further affirmation that portion of the Permian is a very desirable area to grow a portfolio,” Lidsky said.

Wall Street’s “show me the cash” mood will drive further consolidation over the next six to 12 months because it favors larger companies with the size and scale to deploy technology and drive efficiency gains, he said.

“Fundamentally, there are still quite a number of small to mid-cap players within the Permian Basin, and you certainly have larger companies in the Permian Basin. As various benches of rocks get proved up, companies that are large can benefit from their organization and size to develop these resources.”

Wall Street’s pressure on small and mid-cap companies to create value by drilling and completing wells challenges these companies because it takes time to reach a cash flow positive balance, he said.

When the smaller companies that were at the forefront of the shale plays shift into development mode, “size matters. That’s where size and scale is an advantage for the larger companies. There are a number of small to mid-cap companies with good positions who are not necessarily being rewarded for those positions due to their size,” he said.

He listed as examples Laredo Petroleum, active in the Midland Basin, and Jagged Peak Energy, PDC and Carrizo in the Delaware Basin, which have attractive portfolios but not the size or structure to fully develop them.

He said that doesn’t mean there isn’t a place for established, smaller companies like Endeavor Energy Resources or CrownQuest Operating.

“The Permian Basin is the leader among the world in resources to be developed,” Lidsky said. “As these companies drill daily, new benches are being extended, new areas are opening up. There is a place for smaller companies. They will deploy their capital in areas where they believe they can further delineate benches or outlines of a play. We see that as they move up the Central Basin Platform, which is a little more unproven. With their expertise, there is a place for them to play.”

With the Permian’s takeaway capacity sharply constrained, Lidsky said a number of companies are drilling but not completing wells, which could be a capital expenditure target in the near future.

“There is a rapidly growing inventory of drilled, uncompleted wells in the Permian Basin. In August, a record number of DUCs were drilled, at a rate of seven a day,” Lidsky said. “The number now is at 3,630 DUCs in the Permian Basin. That’s clearly a function of pipeline takeaway constrains short-term. Pipe is on the way, and within a year there will be more takeaway capacity. I expect capital dollars to turn their attention to that inventory of DUCs.”

Though there have been 16 Permian-focused deals of $1 billion or more, Lidsky said there are a number of large companies that have not yet made major acquisitions, including Pioneer Natural Resources, Apache Corp., Devon Energy, WPX Energy and Cimarex Energy.

Another reason he expects continued M&A activity is the more than $30 billion in quality assets on the market, not to mention the more than $15 billion of private equity looking for rapid deployment.

Lidsky does expect more deals along the lines of Concho-RSP or Diamondback-Energen -- not necessarily to the tune of $9 billion, he said, but more along the lines of $4 billion to $5 billion.

Mella McEwen is the Oil Editor and covers the latest business and energy news. You can read more from herhere.|mmcewen@mrt.com|